Wendy's Co 10-Q

Item 1. Financial Statements. THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Par Value) June 28, 2020 December 29, 2019 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 338,002 $ 300,195 Restricted cash 30,606 34,539 Accounts and notes receivable, net 134,519 117,461 Inventories 4,411 3,891 Prepaid expenses and other current assets 36,003 15,585 Advertising funds restricted assets 154,367 82,376 Total current assets 697,908 554,047 Properties 934,980 977,000 Finance lease assets 201,418 200,144 Operating lease assets 839,276 857,199 Goodwill 749,080 755,911 Other intangible assets 1,234,065 1,247,212 Investments 42,592 45,949 Net investment in sales-type and direct financing leases 258,798 256,606 Other assets 112,239 100,461 Total assets $ 5,070,356 $ 4,994,529 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 146,769 $ 22,750 Current portion of finance lease liabilities 10,552 11,005 Current portion of operating lease liabilities 44,246 43,775 Accounts payable 20,597 22,701 Accrued expenses and other current liabilities 113,209 165,272 Advertising funds restricted liabilities 157,262 84,195 Total current liabilities 492,635 349,698 Long-term debt 2,238,705 2,257,561 Long-term finance lease liabilities 489,340 480,847 Long-term operating lease liabilities 880,745 897,737 Deferred income taxes 271,490 270,759 Deferred franchise fees 89,384 91,790 Other liabilities 124,074 129,778 Total liabilities 4,586,373 4,478,170 Commitments and contingencies Stockholders’ equity: Common stock, $ 0.10 par value; 1,500,000 shares authorized; 470,424 shares issued; 223,749 and 224,889 shares outstanding, respectively 47,042 47,042 Additional paid-in capital 2,892,699 2,874,001 Retained earnings 187,086 185,725 Common stock held in treasury, at cost; 246,675 and 245,535 shares, respectively ( 2,580,658 ) ( 2,536,581 ) Accumulated other comprehensive loss ( 62,186 ) ( 53,828 ) Total stockholders’ equity 483,983 516,359 Total liabilities and stockholders’ equity $ 5,070,356 $ 4,994,529 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 (Unaudited) Revenues: Sales $ 164,217 $ 181,050 $ 331,015 $ 348,747 Franchise royalty revenue and fees 103,120 109,125 204,825 211,078 Franchise rental income 56,857 58,561 114,713 117,013 Advertising funds revenue 78,112 86,612 156,713 167,093 402,306 435,348 807,266 843,931 Costs and expenses: Cost of sales 140,626 151,092 290,625 293,671 Franchise support and other costs 5,454 4,066 13,467 10,084 Franchise rental expense 31,297 28,027 60,598 60,478 Advertising funds expense 81,317 88,667 161,305 169,148 General and administrative 48,592 50,784 100,231 100,097 Depreciation and amortization 34,714 31,484 65,760 64,669 System optimization gains, net ( 1,987 ) ( 110 ) ( 2,310 ) ( 122 ) Reorganization and realignment costs 2,911 3,570 6,821 4,368 Impairment of long-lived assets 117 198 4,704 1,684 Other operating income, net ( 1,396 ) ( 3,003 ) ( 3,328 ) ( 6,985 ) 341,645 354,775 697,873 697,092 Operating profit 60,661 80,573 109,393 146,839 Interest expense, net ( 29,085 ) ( 29,931 ) ( 57,610 ) ( 59,013 ) Loss on early extinguishment of debt — ( 7,150 ) — ( 7,150 ) Other (expense) income, net ( 144 ) 2,247 932 4,947 Income before income taxes 31,432 45,739 52,715 85,623 Provision for income taxes ( 6,528 ) ( 13,353 ) ( 13,370 ) ( 21,343 ) Net income $ 24,904 $ 32,386 $ 39,345 $ 64,280 Net income per share: Basic $ .11 $ .14 $ .18 $ .28 Diluted .11 .14 .17 .27 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 (Unaudited) Net income $ 24,904 $ 32,386 $ 39,345 $ 64,280 Other comprehensive income (loss): Foreign currency translation adjustment 4,149 3,835 ( 8,358 ) 9,860 Other comprehensive income (loss) 4,149 3,835 ( 8,358 ) 9,860 Comprehensive income $ 29,053 $ 36,221 $ 30,987 $ 74,140 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In Thousands) Common Stock Additional Paid-In Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total (Unaudited) Balance at December 29, 2019 $ 47,042 $ 2,874,001 $ 185,725 $ ( 2,536,581 ) $ ( 53,828 ) $ 516,359 Net income — — 14,441 — — 14,441 Other comprehensive loss — — — — ( 12,507 ) ( 12,507 ) Cash dividends — — ( 26,793 ) — — ( 26,793 ) Repurchases of common stock, including accelerated share repurchase — 15,000 — ( 58,336 ) — ( 43,336 ) Share-based compensation — 4,539 — — — 4,539 Common stock issued upon exercises of stock options — 280 — 1,330 — 1,610 Common stock issued upon vesting of restricted shares — ( 4,017 ) — 726 — ( 3,291 ) Other — 33 ( 7 ) 27 — 53 Balance at March 29, 2020 $ 47,042 $ 2,889,836 $ 173,366 $ ( 2,592,834 ) $ ( 66,335 ) $ 451,075 Net income — — 24,904 — — 24,904 Other comprehensive income — — — — 4,149 4,149 Cash dividends — — ( 11,181 ) — — ( 11,181 ) Share-based compensation — 4,787 — — — 4,787 Common stock issued upon exercises of stock options — ( 902 ) — 11,361 — 10,459 Common stock issued upon vesting of restricted shares — ( 1,041 ) — 773 — ( 268 ) Other — 19 ( 3 ) 42 — 58 Balance at June 28, 2020 $ 47,042 $ 2,892,699 $ 187,086 $ ( 2,580,658 ) $ ( 62,186 ) $ 483,983 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED (In Thousands) Common Stock Additional Paid-In Capital Retained Earnings Common Stock Held in Treasury Accumulated Other Comprehensive Loss Total (Unaudited) Balance at December 30, 2018 $ 47,042 $ 2,884,696 $ 146,277 $ ( 2,367,893 ) $ ( 61,673 ) $ 648,449 Net income — — 31,894 — — 31,894 Other comprehensive income — — — — 6,025 6,025 Cash dividends — — ( 23,069 ) — — ( 23,069 ) Repurchases of common stock — — — ( 29,370 ) — ( 29,370 ) Share-based compensation — 5,022 — — — 5,022 Common stock issued upon exercises of stock options — ( 205 ) — 9,053 — 8,848 Common stock issued upon vesting of restricted shares — ( 8,874 ) — 2,819 — ( 6,055 ) Cumulative effect of change in accounting principle — — ( 1,105 ) — — ( 1,105 ) Other — 24 ( 6 ) 37 — 55 Balance at March 31, 2019 $ 47,042 $ 2,880,663 $ 153,991 $ ( 2,385,354 ) $ ( 55,648 ) $ 640,694 Net income — — 32,386 — — 32,386 Other comprehensive income — — — — 3,835 3,835 Cash dividends — — ( 23,124 ) — — ( 23,124 ) Repurchases of common stock — — — ( 20,391 ) — ( 20,391 ) Share-based compensation — 4,986 — — — 4,986 Common stock issued upon exercises of stock options — ( 339 ) — 10,830 — 10,491 Common stock issued upon vesting of restricted shares — ( 1,852 ) — 964 — ( 888 ) Other — 26 ( 4 ) 37 — 59 Balance at June 30, 2019 $ 47,042 $ 2,883,484 $ 163,249 $ ( 2,393,914 ) $ ( 51,813 ) $ 648,048 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended June 28, 2020 June 30, 2019 (Unaudited) Cash flows from operating activities: Net income $ 39,345 $ 64,280 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65,760 64,669 Share-based compensation 9,326 10,008 Impairment of long-lived assets 4,704 1,684 Deferred income tax 1,920 3,422 Non-cash rental expense, net 12,251 11,519 Change in operating lease liabilities ( 19,233 ) ( 20,983 ) Net receipt of deferred vendor incentives 7,728 5,312 System optimization gains, net ( 2,310 ) ( 122 ) Distributions received from joint ventures, net of equity in earnings 1,262 2,099 Long-term debt-related activities, net 3,141 10,799 Changes in operating assets and liabilities and other, net ( 93,332 ) 1,373 Net cash provided by operating activities 30,562 154,060 Cash flows from investing activities: Capital expenditures ( 29,402 ) ( 25,484 ) Acquisitions — ( 5,052 ) Dispositions 4,320 1,240 Proceeds from sale of investments — 130 Notes receivable, net 138 ( 750 ) Net cash used in investing activities ( 24,944 ) ( 29,916 ) Cash flows from financing activities: Proceeds from long-term debt 153,315 850,000 Repayments of long-term debt ( 24,271 ) ( 877,876 ) Repayments of finance lease liabilities ( 3,707 ) ( 3,521 ) Deferred financing costs ( 2,122 ) ( 14,008 ) Repurchases of common stock ( 45,137 ) ( 50,781 ) Dividends ( 37,974 ) ( 46,193 ) Proceeds from stock option exercises 11,865 19,160 Payments related to tax withholding for share-based compensation ( 3,704 ) ( 6,957 ) Net cash provided by (used in) financing activities 48,265 ( 130,176 ) Net cash provided by (used in) operations before effect of exchange rate changes on cash 53,883 ( 6,032 ) Effect of exchange rate changes on cash ( 3,132 ) 3,866 Net increase (decrease) in cash, cash equivalents and restricted cash 50,751 ( 2,166 ) Cash, cash equivalents and restricted cash at beginning of period 358,707 486,512 Cash, cash equivalents and restricted cash at end of period $ 409,458 $ 484,346 Supplemental non-cash investing and financing activities: Capital expenditures included in accounts payable $ 6,082 $ 5,398 Finance leases 12,962 23,534 June 28, 2020 December 29, 2019 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 338,002 $ 300,195 Restricted cash 30,606 34,539 Restricted cash, included in Advertising funds restricted assets 40,850 23,973 Total cash, cash equivalents and restricted cash $ 409,458 $ 358,707 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments of a normal recurring nature necessary to present fairly our financial position as of June 28, 2020, the results of our operations for the three and six months ended June 28, 2020 and June 30, 2019 and cash flows for the six months ended June 28, 2020 and June 30, 2019. The Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (the “Form 10-K”). The novel coronavirus (COVID-19) pandemic has disrupted and is expected to continue to disrupt our business, which has materially affected and could continue to materially affect our financial condition and results of operations for an extended period of time. As such, the results of operations for the three and six months ended June 28, 2020 are not necessarily indicative of the results to be expected for the full 2020 fiscal year. See Notes 3, 7, 9, 11 and 14 for further information regarding actions taken by the Company in response to the COVID-19 pandemic and certain impacts of the COVID-19 pandemic on our condensed consolidated financial statements. The principal 100% owned subsidiary of the Company is Wendy’s International, LLC and its subsidiaries (“Wendy’s”). The Company manages and internally reports its business in the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Certain prior period financial information has been revised to align with this segment reporting structure. See Note 19 for further information. We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to or on December 31. All three- and six-month periods presented herein contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue. (2) New Accounting Standards New Accounting Standards Adopted Income Taxes In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and the simplification of areas such as franchise taxes, transactions that result in a step-up in the tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws or tax rate changes. The Company early adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. Fair Value Measurement In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company adopted this guidance during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. 10 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Goodwill Impairment In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. Credit Losses In June 2016, the FASB issued an amendment that requires the Company to use a current expected credit loss model that results in the immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, including trade receivables. The Company adopted this amendment during the first quarter of 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. (3) Revenue Disaggregation of Revenue The following tables disaggregate revenue by segment and source: Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Three Months Ended June 28, 2020 Sales at Company-operated restaurants $ 164,217 $ — $ — $ 164,217 Franchise royalty revenue 88,121 9,070 — 97,191 Franchise fees 5,308 433 188 5,929 Franchise rental income — — 56,857 56,857 Advertising funds revenue 73,612 4,500 — 78,112 Total revenues $ 331,258 $ 14,003 $ 57,045 $ 402,306 Six Months Ended June 28, 2020 Sales at Company-operated restaurants $ 331,015 $ — $ — $ 331,015 Franchise royalty revenue 172,954 19,593 — 192,547 Franchise fees 10,593 906 779 12,278 Franchise rental income — — 114,713 114,713 Advertising funds revenue 147,737 8,976 — 156,713 Total revenues $ 662,299 $ 29,475 $ 115,492 $ 807,266 Three Months Ended June 30, 2019 Sales at Company-operated restaurants $ 181,050 $ — $ — $ 181,050 Franchise royalty revenue 91,430 11,391 — 102,821 Franchise fees 5,238 464 602 6,304 Franchise rental income — — 58,561 58,561 Advertising funds revenue 81,437 5,175 — 86,612 Total revenues $ 359,155 $ 17,030 $ 59,163 $ 435,348 11 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Wendy’s U.S. Wendy’s International Global Real Estate & Development Total Six Months Ended June 30, 2019 Sales at Company-operated restaurants $ 348,747 $ — $ — $ 348,747 Franchise royalty revenue 175,808 21,856 — 197,664 Franchise fees 10,668 1,497 1,249 13,414 Franchise rental income — — 117,013 117,013 Advertising funds revenue 157,418 9,675 — 167,093 Total revenues $ 692,641 $ 33,028 $ 118,262 $ 843,931 Contract Balances The following table provides information about receivables and contract liabilities (deferred franchise fees) from contracts with customers: June 28, 2020 (a) December 29, 2019 (a) Receivables, which are included in “Accounts and notes receivable, net” (b) (c) $ 86,834 $ 39,188 Receivables, which are included in “Advertising funds restricted assets” (c) 83,891 54,394 Deferred franchise fees (d) 98,563 100,689 _______________ (a) Excludes funds collected from the sale of gift cards, which are primarily reimbursed to franchisees upon redemption at franchised restaurants and do not ultimately result in the recognition of revenue in the Company’s condensed consolidated statements of operations. (b) Includes receivables related to “Sales” and “Franchise royalty revenue and fees.” (c) The increase in receivables as of June 28, 2020 was primarily due to extending payment terms for royalties and national advertising funds contributions by 45 days beginning in April for a three month period in response to the COVID-19 pandemic. See Note 7 for further information. (d) Deferred franchise fees are included in “Accrued expenses and other current liabilities” and “Deferred franchise fees” and totaled $ 9,179 and $ 89,384 as of June 28, 2020, respectively, and $ 8,899 and $ 91,790 as of December 29, 2019, respectively. Significant changes in deferred franchise fees are as follows: Six Months Ended June 28, 2020 June 30, 2019 Deferred franchise fees at beginning of period $ 100,689 $ 102,205 Revenue recognized during the period ( 3,898 ) ( 4,609 ) New deferrals due to cash received and other 1,772 3,671 Deferred franchise fees at end of period $ 98,563 $ 101,267 12 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Anticipated Future Recognition of Deferred Franchise Fees The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period: Estimate for fiscal year: 2020 (a) $ 6,091 2021 6,195 2022 5,991 2023 5,819 2024 5,616 Thereafter 68,851 $ 98,563 _______________ (a) Represents franchise fees expected to be recognized for the remainder of 2020, which includes development-related franchise fees expected to be recognized over a duration of one year or less. (4) Acquisitions No restaurants were acquired from franchisees during the six months ended June 28, 2020. During the six months ended June 30, 2019, the Company acquired five restaurants from franchisees for total net cash consideration of $ 5,052 . The Company did not incur any material acquisition-related costs associated with the acquisitions during the six months ended June 30, 2019 and such transactions were not significant to our condensed consolidated financial statements. The table below presents the allocation of the total purchase price to the fair value of assets acquired and liabilities assumed for restaurants acquired from franchisees: Six Months Ended June 30, 2019 Restaurants acquired from franchisees 5 Total consideration paid, net of cash received $ 5,052 Identifiable assets acquired and liabilities assumed: Properties 666 Acquired franchise rights 1,354 Finance lease assets 5,350 Finance lease liabilities ( 4,084 ) Other ( 2,316 ) Total identifiable net assets 970 Goodwill $ 4,082 During 2018, the Company acquired 16 restaurants from a franchisee for total net cash consideration of $ 21,401 . The fair values of the identifiable intangible assets related to the acquisition were provisional amounts as of December 30, 2018, pending final purchase accounting adjustments. The Company finalized the purchase price allocation during the three months ended March 31, 2019, which resulted in a decrease in the fair value of acquired franchise rights of $ 2,989 and an increase in deferred tax assets of $ 140 . 13 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (5) System Optimization Gains, Net The Company’s system optimization initiative includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”). As of January 1, 2017, the Company completed its plan to reduce its ongoing Company-operated restaurant ownership to approximately 5 % of the total system. While the Company has no plans to reduce its ownership below the approximately 5 % level, the Company expects to continue to optimize the Wendy’s system through Franchise Flips, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base, drive new restaurant development and accelerate reimages. During the six months ended June 28, 2020, the Company facilitated three Franchise Flips. No Franchise Flips were facilitated by the Company during the six months ended June 30, 2019. The Company expects to sell 43 Company-operated restaurants in New York to franchisees in the first quarter of 2021. The Company expects to retain its Company-operated restaurants in Manhattan. Gains and losses recognized on dispositions are recorded to “System optimization gains, net” in our condensed consolidated statements of operations. Costs related to acquisitions and dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” which are further described in Note 6. All other costs incurred related to facilitating Franchise Flips are recorded to “Franchise support and other costs.” The following is a summary of the disposition activity recorded as a result of our system optimization initiative: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Post-closing adjustments on sales of restaurants (a) $ — $ 62 $ 345 $ 54 Gain on sales of other assets, net (b) 1,987 48 1,965 68 System optimization gains, net $ 1,987 $ 110 $ 2,310 $ 122 _______________ (a) The six months ended June 28, 2020 represents the recognition of deferred gains as a result of the resolution of certain contingencies related to the extension of lease terms for restaurants previously sold to franchisees. (b) During the three and six months ended June 28, 2020, the Company received cash proceeds of $ 4,125 and $ 4,320 , respectively, primarily from the sale of surplus and other properties. During the three and six months ended June 30, 2019, the Company received cash proceeds of $ 1,240 , primarily from the sale of surplus properties. Assets Held for Sale June 28, 2020 December 29, 2019 Number of restaurants classified as held for sale 43 — Net restaurant assets held for sale (a) $ 20,468 $ — Other assets held for sale (b) $ 2,317 $ 1,437 _______________ (a) Net restaurant assets held for sale include the New York Company-operated restaurants we expect to sell in the first quarter of 2021 and consist primarily of cash, inventory, property and an estimate of allocable goodwill. (b) Other assets held for sale primarily consist of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.” 14 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (6) Reorganization and Realignment Costs The following is a summary of the initiatives included in “Reorganization and realignment costs:” Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 IT realignment $ 2,847 $ — $ 6,406 $ — G&A realignment 64 3,517 331 4,299 System optimization initiative — 53 84 69 Reorganization and realignment costs $ 2,911 $ 3,570 $ 6,821 $ 4,368 Information Technology ( “ IT ”) Realignment In December 2019, our Board of Directors approved a plan to realign and reinvest resources in the Company’s IT organization to strengthen its ability to accelerate growth. The Company is partnering with a third-party global IT consultant on this new structure to leverage their global capabilities, which the Company believes will enable a more seamless integration between its digital and corporate IT assets. The Company expects that the realignment plan will reduce certain employee compensation and other related costs that the Company intends to reinvest back into IT to drive additional capabilities and capacity across all of its technology platforms. Additionally, in June 2020, the Company made changes to its leadership structure that included the creation of a Chief Information Officer position and the elimination of the Chief Digital Experience Officer position. As a result, the Company now expects to incur total costs aggregating approximately $ 16,000 to $ 17,000 related to the plan. During the six months ended June 28, 2020, the Company recognized costs totaling $ 6,406 , which primarily included third-party and other costs and severance and related employee costs. The Company expects to incur additional costs aggregating approximately $ 1,000 , comprised primarily of recruitment and relocation costs. The Company expects to recognize the majority of the remaining costs associated with the plan during the remainder of 2020. The following is a summary of the activity recorded as a result of the IT realignment plan: Three Months Ended Six Months Ended Total Incurred Since Inception June 28, 2020 June 28, 2020 Severance and related employee costs $ 830 $ 975 $ 8,523 Recruitment and relocation costs 143 314 314 Third-party and other costs 1,874 5,117 6,503 2,847 6,406 15,340 Share-based compensation (a) — — 193 Total IT realignment $ 2,847 $ 6,406 $ 15,533 _______________ (a) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our IT realignment plan. 15 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The table below presents a rollforward of our accruals for the IT realignment plan, which are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 4,039 and $ 371 as of June 28, 2020, respectively. Balance December 29, 2019 Charges Payments Balance June 28, 2020 Severance and related employee costs $ 7,548 $ 975 $ ( 4,113 ) $ 4,410 Recruitment and relocation costs — 314 ( 314 ) — Third-party and other costs 1,076 5,117 ( 6,193 ) — $ 8,624 $ 6,406 $ ( 10,620 ) $ 4,410 General and Administrative ( “ G&A ”) Realignment In May 2017, the Company initiated a plan to further reduce its G&A expenses. Additionally, in May 2019, the Company announced changes to its management and operating structure that included the creation of two new positions, a President, U.S and Chief Commercial Officer and a President, International and Chief Development Officer, and the elimination of the Chief Operations Officer position. During the six months ended June 28, 2020 and June 30, 2019, the Company recognized costs related to the plan totaling $ 331 and $ 4,299 , respectively, which primarily included severance and related employee costs and share-based compensation. The Company does not expect to incur any additional material costs under the plan. The following is a summary of the activity recorded as a result of the G&A realignment plan: Three Months Ended Six Months Ended Total Incurred Since Inception June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Severance and related employee costs (a) $ ( 6 ) $ 2,130 $ 146 $ 2,602 $ 24,384 Recruitment and relocation costs — 482 15 596 2,531 Third-party and other costs — 71 1 87 2,211 ( 6 ) 2,683 162 3,285 29,126 Share-based compensation (b) 70 834 169 1,014 8,067 Termination of defined benefit plans — — — — 1,335 Total G&A realignment $ 64 $ 3,517 $ 331 $ 4,299 $ 38,528 _______________ (a) The three and six months ended June 28, 2020 includes a reversal of an accrual as a result of a change in estimate. (b) Primarily represents incremental share-based compensation resulting from the modification of stock options in connection with the termination of employees under our G&A realignment plan. The accruals for our G&A realignment plan are included in “Accrued expenses and other current liabilities” and “Other liabilities” and totaled $ 2,705 and $ 108 as of June 28, 2020, respectively, and $ 4,835 and $ 607 as of June 30, 2019, respectively. The tables below present a rollforward of our accruals for the plan. Balance December 29, 2019 Charges Payments Balance June 28, 2020 Severance and related employee costs $ 5,276 $ 146 $ ( 2,671 ) $ 2,751 Recruitment and relocation costs 83 15 ( 36 ) 62 Third-party and other costs — 1 ( 1 ) — $ 5,359 $ 162 $ ( 2,708 ) $ 2,813 16 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Balance December 30, 2018 Charges Payments Balance June 30, 2019 Severance and related employee costs $ 7,241 $ 2,602 $ ( 4,724 ) $ 5,119 Recruitment and relocation costs 83 596 ( 356 ) 323 Third-party and other costs — 87 ( 87 ) — $ 7,324 $ 3,285 $ ( 5,167 ) $ 5,442 System Optimization Initiative The Company recognizes costs related to acquisitions and dispositions under its system optimization initiative. The Company has incurred costs of $ 72,365 under the initiative since inception and does not expect to incur any material additional costs under the plan. (7) Cash and Receivables June 28, 2020 December 29, 2019 Cash and cash equivalents Cash $ 202,939 $ 185,203 Cash equivalents 135,063 114,992 338,002 300,195 Restricted cash Accounts held by trustee for the securitized financing facility 30,274 34,209 Other 332 330 30,606 34,539 Advertising Funds (a) 40,850 23,973 71,456 58,512 Total cash, cash equivalents and restricted cash $ 409,458 $ 358,707 _______________ (a) Included in “Advertising funds restricted assets.” June 28, 2020 December 29, 2019 Gross Allowance for Doubtful Accounts Net Gross Allowance for Doubtful Accounts Net Accounts and Notes Receivable, Net Current Accounts receivable (a) (b) $ 125,021 $ ( 4,404 ) $ 120,617 $ 103,852 $ ( 3,314 ) $ 100,538 Notes receivable from franchisees (c) (d) 18,572 ( 4,670 ) 13,902 23,628 ( 6,705 ) 16,923 $ 143,593 $ ( 9,074 ) $ 134,519 $ 127,480 $ ( 10,019 ) $ 117,461 Non-current (e) Notes receivable from franchisees (d) $ 6,425 $ ( 835 ) $ 5,590 $ 1,617 $ — $ 1,617 _______________ (a) Includes income tax refund receivables of $ 5,933 and $ 13,555 as of June 28, 2020 and December 29, 2019, respectively. Additionally, 2019 includes receivables of $ 25,350 related to insurance coverage for the financial institutions class action. 17 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (b) During the six months ended June 28, 2020, royalty receivables increased by $ 47,740 and rent receivables increased by $ 6,111 . These increases were primarily due to actions taken by the Company in response to the COVID-19 pandemic, which included (1) extending payment terms for royalties by 45 days beginning in April for a three month period and (2) offering to defer base rent payments on properties owned by Wendy’s and leased to franchisees by 50%, and offering to pass along any deferrals that were obtained on properties leased by Wendy’s and subleased to franchisees by up to 100%, beginning in May for a three month period, which will be repaid over 12 months beginning in August. (c) Includes the current portion of sales-type and direct financing lease receivables of $ 3,780 and $ 3,146 as of June 28, 2020 and December 29, 2019, respectively. Included a note receivable from a U.S. franchisee totaling $ 1,000 as of December 29, 2019. The note was repaid during the six months ended June 28, 2020. (d) Includes a note receivable from a franchisee in India, of which $ 150 and $ 1,000 are included in current notes receivable as of June 28, 2020 and December 29, 2019, respectively, and $ 1,010 is included in non-current notes receivable as of June 28, 2020. As of June 28, 2020 and December 29, 2019, the Company had a reserve of $ 985 on the loan outstanding to the franchisee in India. Includes a note receivable from a franchisee in Indonesia, of which $ 1,367 and $ 1,262 are included in current notes receivable and $ 1,065 and $ 1,617 are included in non-current notes receivable as of June 28, 2020 and December 29, 2019, respectively. Includes notes receivable related to a joint venture for the operation of Wendy’s restaurants in Brazil (the “Brazil JV”), of which $ 11,975 and $ 15,920 are included in current notes receivable as of June 28, 2020 and December 29, 2019, respectively, and $ 4,350 is included in non-current notes receivable as of June 28, 2020. As of June 28, 2020 and December 29, 2019, the Company had reserves of $ 4,520 and $ 5,720 , respectively, on the loans outstanding related to the Brazil JV. (e) Included in “Other assets.” Reserve estimates include consideration of the likelihood of default expected over the estimated life of the receivable. The Company periodically assesses the need for an allowance for doubtful accounts on its receivables based upon several key credit quality indicators such as outstanding past due balances, the financial strength of the obligor, the estimated fair value of any underlying collateral and agreement characteristics. We believe that our vulnerability to risk concentrations in our receivables is mitigated by (1) favorable historical collectability on past due balances, (2) recourse to the underlying collateral regarding sales-type and direct financing lease receivables, and (3) our expectations for fluctuations in general market conditions. Receivables are considered delinquent once they are contractually past due under the terms of the underlying agreements. As of June 28, 2020, there were no material receivables more than one year past due. 18 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The following is an analysis of the allowance for doubtful accounts: Accounts Receivable Notes Receivable Total Six Months Ended June 28, 2020 Balance at December 29, 2019 $ 3,314 $ 6,705 $ 10,019 Provision for doubtful accounts 1,156 ( 8 ) 1,148 Uncollectible accounts written off, net of recoveries ( 66 ) ( 1,192 ) ( 1,258 ) Balance at June 28, 2020 $ 4,404 $ 5,505 $ 9,909 Six Months Ended June 30, 2019 Balance at December 30, 2018 $ 4,940 $ 2,000 $ 6,940 Provision for doubtful accounts ( 754 ) 1,843 1,089 Uncollectible accounts written off, net of recoveries ( 139 ) 7 ( 132 ) Balance at June 30, 2019 $ 4,047 $ 3,850 $ 7,897 (8) Investments Equity Investments Wendy’s has a 50 % share in a partnership in a Canadian restaurant real estate joint venture (“TimWen”) with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons ® brand. (Tim Hortons is a registered trademark of Tim Hortons USA Inc.) In addition, a wholly-owned subsidiary of Wendy’s has a 20 % share in the Brazil JV. The Company has significant influence over these investees. Such investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income (loss) of the investees in “Other operating income, net.” Presented below is activity related to our investment in TimWen and the Brazil JV included in our condensed consolidated financial statements: Six Months Ended June 28, 2020 June 30, 2019 Balance at beginning of period $ 45,310 $ 47,021 Equity in earnings for the period 3,455 6,048 Amortization of purchase price adjustments (a) ( 1,105 ) ( 1,129 ) 2,350 4,919 Distributions received ( 3,612 ) ( 7,018 ) Foreign currency translation adjustment included in “Other comprehensive income (loss)” and other ( 1,631 ) 2,359 Balance at end of period $ 42,417 $ 47,281 _______________ (a) Purchase price adjustments that impacted the carrying value of the Company’s investment in TimWen are being amortized over the average original aggregate life of 21 years. 19 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (9) Long-Term Debt Long-term debt consisted of the following: June 28, 2020 December 29, 2019 Series 2019-1 Class A-2 Notes: 3.783 % Series 2019-1 Class A-2-I Notes, anticipated repayment date 2026 $ 392,000 $ 398,000 4.080 % Series 2019-1 Class A-2-II Notes, anticipated repayment date 2029 441,000 447,750 Series 2018-1 Class A-2 Notes: 3.573 % Series 2018-1 Class A-2-I Notes, anticipated repayment date 2025 438,750 441,000 3.884 % Series 2018-1 Class A-2-II Notes, anticipated repayment date 2028 463,125 465,500 Series 2015-1 Class A-2 Notes: 4.497 % Series 2015-1 Class A-2-III Notes, anticipated repayment date 2025 476,250 478,750 Series 2019-1 Class A-1 Variable Funding Senior Secured Notes 120,000 — Canadian revolving credit facility 4,019 — 7 % debentures, due in 2025 83,415 82,837 Unamortized debt issuance costs ( 33,085 ) ( 33,526 ) 2,385,474 2,280,311 Less amounts payable within one year ( 146,769 ) ( 22,750 ) Total long-term debt $ 2,238,705 $ 2,257,561 Senior Notes Wendy’s Funding, LLC, a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of The Wendy’s Company, is the master issuer (the “Master Issuer”) of outstanding senior secured notes under a securitized financing facility that was entered into in June 2015. Under this facility, in June 2019, the Master Issuer also issued outstanding Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “2019-1 Class A-1 Notes”), which allow for the borrowing of up to $ 150,000 from time to time on a revolving basis using various credit instruments, including a letter of credit facility. In March 2020, the Company drew down $ 120,000 under the 2019-1 Class A-1 Notes. As a result, as of June 28, 2020, the Company had outstanding borrowings of $ 120,000 under the 2019-1 Class A-1 Notes. Subsequent to June 28, 2020, the Company repaid the $ 120,000 outstanding balance under the 2019-1 Class A-1 Notes. In June 2020, the Master Issuer also issued outstanding Series 2020-1 Variable Funding Senior Secured Notes, Class A-1 (the “2020-1 Class A-1 Notes”), which allow for the borrowing of up to $ 100,000 from time to time on a revolving basis using various credit instruments. The Company had no outstanding borrowings under the Series 2020-1 Class A-1 Notes as of June 28, 2020. The borrowing under the 2019-1 Class A-1 Notes in March 2020 and the issuance of the 2020-1 Class A-1 Notes in June 2020 were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic. The 2019-1 Class A-1 Notes and the 2020-1 Class A-1 Notes (collectively, the “Class A-1 Notes”) accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate (“LIBOR”) for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the respective purchase agreements for the Class A-1 Notes. There is a commitment fee on the unused portions of the Class A-1 Notes, which ranges from 0.40 % to 0.75 % based on utilization for the 2019-1 Class A-1 Notes, and is 1.50 % for the 2020-1 Class A-1 Notes. As of June 28, 2020, $ 26,040 of letters of credit were outstanding against the 2019-1 Class A-1 Notes, which relate primarily to interest reserves required under the indenture governing the 2019-1 Class A-1 Notes. During the three and six months ended June 28, 2020, the Company incurred debt issuance costs of $ 2,122 in connection with the issuance of the 2020-1 Class A-1 Notes. The debt issuance costs are being amortized to “Interest expense, net” utilizing the effective interest rate method. 20 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Other Long-Term Debt A Canadian subsidiary of Wendy’s has a revolving credit facility of C$ 6,000 , which bears interest at the Bank of Montreal Prime Rate. The debt is guaranteed by Wendy’s. In March 2020, the Company drew down C$ 5,500 under the revolving credit facility. As a result, as of June 28, 2020, the Company had outstanding borrowings of C$ 5,500 under the revolving credit facility. Wendy’s U.S. advertising fund has a revolving line of credit of $ 25,000 , which was established to support the advertising fund operations and bears interest at LIBOR plus 2.75 %. In February 2020, the Company drew down $ 4,397 under the revolving line of credit, which the Company repaid in February 2020. In March 2020, the Company drew down $ 25,000 under the revolving line of credit. As a result, as of June 28, 2020, the Company had outstanding borrowings of $ 25,000 under the revolving line of credit, which is included in “Advertising funds restricted liabilities.” Subsequent to June 28, 2020, the Company renewed the revolving line of credit, which is now guaranteed by Wendy’s. The increased borrowings were taken as precautionary measures to provide enhanced financial flexibility considering the uncertain market conditions arising from the COVID-19 pandemic. (10) Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques under the accounting guidance related to fair value measurements are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified into the following hierarchy: • Level 1 Inputs - Quoted prices for identical assets or liabilities in active markets. • Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3 Inputs - Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation. 21 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments: June 28, 2020 December 29, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Fair Value Measurements Financial assets Cash equivalents $ 135,063 $ 135,063 $ 114,992 $ 114,992 Level 1 Other investments in equity securities (a) 175 175 639 1,649 Level 3 Financial liabilities Series 2019-1 Class A-2-I Notes (b) 392,000 410,071 398,000 405,152 Level 2 Series 2019-1 Class A-2-II Notes (b) 441,000 468,518 447,750 459,136 Level 2 Series 2018-1 Class A-2-I Notes (b) 438,750 451,298 441,000 444,859 Level 2 Series 2018-1 Class A-2-II Notes (b) 463,125 487,624 465,500 475,718 Level 2 Series 2015-1 Class A-2-III Notes (b) 476,250 488,490 478,750 490,531 Level 2 Series 2019-1 Class A-1 Notes (b) 120,000 116,100 — — Level 2 U.S. advertising fund revolving line of credit 25,000 25,000 — — Level 2 Canadian revolving credit facility 4,019 4,019 — — Level 2 7% debentures, due in 2025 (b) 83,415 83,415 82,837 94,838 Level 2 _______________ (a) The fair values of our investments are not significant and are based on our review of information provided by the investment managers or investees which was based on (1) valuations performed by the investment managers or investees, (2) quoted market or broker/dealer prices for similar investments and (3) quoted market or broker/dealer prices adjusted by the investment managers for legal or contractual restrictions, risk of nonperformance or lack of marketability, depending upon the underlying investments. During the three months ended June 28, 2020, the Company impaired a miscellaneous investment due to the deterioration in operating performance of the underlying assets. Subsequent to June 28, 2020, the Company sold its remaining interest in this investment. (b) The fair values were based on quoted market prices in markets that are not considered active markets. The carrying amounts of cash, accounts payable, accrued expenses and lines of credit approximate fair value due to the short-term nature of those items. The carrying amounts of accounts and notes receivable, net (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts. Our cash equivalents are the only financial assets measured and recorded at fair value on a recurring basis. Non-Recurring Fair Value Measurements Assets and liabilities remeasured to fair value on a non-recurring basis resulted in impairment that we have recorded to “Impairment of long-lived assets” in our condensed consolidated statements of operations. Total impairment losses may reflect the impact of remeasuring long-lived assets held and used (including land, buildings, leasehold improvements, favorable lease assets and ROU assets) to fair value as a result of (1) declines in operating performance at Company-operated restaurants and (2) the Company’s decision to lease and/or sublease the land and/or buildings to franchisees in connection with the sale or anticipated sale of restaurants, including any subsequent lease modifications. The fair values of long-lived assets held and used presented in the tables below represent the remaining carrying value and were estimated based on either discounted cash flows of future anticipated lease and sublease income or discounted cash flows of future anticipated Company-operated restaurant performance. 22 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Total impairment losses may also include the impact of remeasuring long-lived assets held for sale, which primarily include surplus properties. The fair values of long-lived assets held for sale presented in the tables below represent the remaining carrying value and were estimated based on current market values. See Note 11 for further information on impairment of our long-lived assets. Fair Value Measurements June 28, 2020 Level 1 Level 2 Level 3 Held and used $ 341 $ — $ — $ 341 Held for sale 1,440 — — 1,440 Total $ 1,781 $ — $ — $ 1,781 Fair Value Measurements December 29, 2019 Level 1 Level 2 Level 3 Held and used $ 3,582 $ — $ — $ 3,582 Held for sale 988 — — 988 Total $ 4,570 $ — $ — $ 4,570 (11) Impairment of Long-Lived Assets During the six months ended June 28, 2020 and June 30, 2019, the Company recorded impairment charges as a result of (1) the deterioration of operating performance of certain Company-operated restaurants and (2) closing Company-operated restaurants and classifying such surplus properties as held for sale. Impairment charges during the six months ended June 28, 2020 were primarily due to the expected deterioration in operating performance of certain Company-operated restaurants as a result of the COVID-19 pandemic. Additional impairment charges may be recognized by the Company in the event of further deterioration in operating performance of Company-operated restaurants. The following is a summary of impairment losses recorded, which represent the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets:” Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Company-operated restaurants $ — $ 86 $ 4,395 $ 287 Surplus properties 117 112 309 1,397 $ 117 $ 198 $ 4,704 $ 1,684 (12) Income Taxes The Company’s effective tax rate for the three months ended June 28, 2020 and June 30, 2019 was 20.8 % and 29.2 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % primarily due to a reduction for the benefit of share-based compensation, partially offset by an increase due to state income taxes. The Company’s effective tax rate for the six months ended June 28, 2020 and June 30, 2019 was 25.4 % and 24.9 %, respectively. The Company’s effective tax rate varied from the U.S. federal statutory rate of 21 % primarily due to (1) a reduction for the benefit of share-based compensation, (2) an increase due to state income taxes and (3) an increase for tax on our foreign operations. There were no significant changes to the unrecognized tax benefits or related interest and penalties for the three and six months ended June 28, 2020. During the next twelve months, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $ 1,319 due primarily to the lapse of statutes of limitations and expected settlements. 23 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) The current portion of refundable income taxes was $ 5,933 and $ 13,555 as of June 28, 2020 and December 29, 2019, respectively, and is included in “Accounts and notes receivable, net” in the condensed consolidated balance sheets. There were no long-term refundable income taxes as of June 28, 2020 and December 29, 2019. (13) Net Income Per Share Basic net income per share was computed by dividing net income amounts by the weighted average number of shares of common stock outstanding. The weighted average number of shares used to calculate basic and diluted net income per share were as follows: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Common stock: Weighted average basic shares outstanding 223,123 231,029 223,329 230,807 Dilutive effect of stock options and restricted shares 4,051 5,064 4,262 5,186 Weighted average diluted shares outstanding 227,174 236,093 227,591 235,993 Diluted net income per share for the three and six months ended June 28, 2020 and June 30, 2019 was computed by dividing net income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares. We excluded potential common shares of 2,636 and 2,652 for the three and six months ended June 28, 2020, respectively, and 2,049 and 2,104 for the three and six months ended June 30, 2019, respectively, from our diluted net income per share calculation as they would have had anti-dilutive effects. (14) Stockholders’ Equity Dividends During the first and second quarter of 2020, the Company paid dividends per share of $ .12 and $ .05 , respectively. During each of the first and second quarters of 2019, the Company paid dividends per share of $ .10 . Repurchases of Common Stock In February 2020, our Board of Directors authorized a repurchase program for up to $ 100,000 of our common stock through February 28, 2021, when and if market conditions warranted and to the extent legally permissible. In July 2020, the Company’s Board of Directors approved an extension of the February 2020 authorization by one year, through February 28, 2022, when and if market and economic conditions warrant and to the extent legally permissible. During the six months ended June 28, 2020, the Company repurchased 779 shares under the February 2020 repurchase authorization with an aggregate purchase price of $ 14,537 , excluding commissions of $ 11 . As of June 28, 2020, the Company had $ 85,463 of availability remaining under its February 2020 authorization. As previously announced, beginning in March 2020, the Company temporarily suspended all share repurchase activity under the February 2020 authorization in connection with the Company’s response to the COVID-19 pandemic. The Company now intends to resume share repurchases in 2020, subject to market conditions and prevailing economic factors. In February 2019, our Board of Directors authorized a repurchase program for up to $ 225,000 of our common stock through March 1, 2020, when and if market conditions warranted and to the extent legally permissible. In November 2019, the Company entered into an accelerated share repurchase agreement (the “2019 ASR Agreement”) with a third-party financial institution to repurchase common stock as part of the Company’s existing share repurchase program. Under the 2019 ASR Agreement, the Company paid the financial institution an initial purchase price of $ 100,000 in cash and received an initial delivery of 4,051 shares of common stock, representing an estimated 85 % of the total shares expected to be delivered under the 2019 ASR Agreement. In February 2020, the Company completed the 2019 ASR Agreement and received an additional 628 shares of common stock. The total number of shares of common stock ultimately purchased by the Company under the 2019 ASR Agreement was based on the average of the daily volume-weighted average prices of the common stock during the term of 24 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) the 2019 ASR Agreement, less an agreed upon discount. In total, 4,679 shares were delivered under the 2019 ASR Agreement at an average purchase price of $ 21.37 per share. In addition to the shares repurchased in connection with the 2019 ASR Agreement, during the six months ended June 28, 2020, the Company repurchased 1,312 shares with an aggregate purchase price of $ 28,770 , excluding commissions of $ 18 , under the February 2019 authorization. After taking into consideration these repurchases, with the completion of the 2019 ASR Agreement in February 2020, the Company completed its February 2019 authorization. During the six months ended June 30, 2019, the Company repurchased 2,824 shares with an aggregate purchase price of $ 49,721 , of which $ 807 was accrued at June 30, 2019, and excluding commissions of $ 40 , under the February 2019 authorization and the Company’s previous November 2018 authorization to repurchase up to $ 220,000 of our common stock. Accumulated Other Comprehensive Loss The following table provides a rollforward of accumulated other comprehensive loss: Six Months Ended June 28, 2020 June 30, 2019 Balance at beginning of period $ ( 53,828 ) $ ( 61,673 ) Foreign currency translation ( 8,358 ) 9,860 Balance at end of period $ ( 62,186 ) $ ( 51,813 ) (15) Leases Nature of Leases The Company operates restaurants that are located on sites owned by us and sites leased by us from third parties. In addition, the Company owns sites and leases sites from third parties, which it leases and/or subleases to franchisees. At June 28, 2020, Wendy’s and its franchisees operated 6,806 Wendy’s restaurants. Of the 358 Company-operated Wendy’s restaurants, Wendy’s owned the land and building for 142 restaurants, owned the building and held long-term land leases for 146 restaurants and held leases covering the land and building for 70 restaurants. Wendy’s also owned 510 and leased 1,243 properties that were either leased or subleased principally to franchisees. The Company also leases restaurant, office and transportation equipment. 25 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) Company as Lessee The components of lease cost are as follows: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Finance lease cost: Amortization of finance lease assets $ 3,338 $ 1,631 $ 6,524 $ 4,748 Interest on finance lease liabilities 10,160 9,939 20,218 16,692 13,498 11,570 26,742 21,440 Operating lease cost 23,969 19,086 45,134 43,729 Variable lease cost (a) 13,848 15,371 28,218 29,475 Short-term lease cost 991 1,153 2,321 2,279 Total operating lease cost (b) 38,808 35,610 75,673 75,483 Total lease cost $ 52,306 $ 47,180 $ 102,415 $ 96,923 _______________ (a) Includes expenses for executory costs of $ 9,457 and $ 9,779 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $ 19,200 and $ 19,303 for the six months ended June 28, 2020 and June 30, 2019, respectively, for which the Company is reimbursed by sublessees. (b) Includes $ 31,263 and $ 28,022 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $ 60,554 and $ 60,473 for the six months ended June 28, 2020 and June 30, 2019, respectively, recorded to “Franchise rental expense” for leased properties that are subsequently leased to franchisees. Also includes $ 6,831 and $ 7,007 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $ 13,664 and $ 13,600 for the six months ended June 28, 2020 and June 30, 2019, respectively, recorded to “Cost of sales” for leases for Company-operated restaurants. Company as Lessor The components of lease income are as follows: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Sales-type and direct-financing leases: Selling profit $ 569 $ 37 $ 1,197 $ 1,971 Interest income 7,260 7,072 14,508 11,805 Operating lease income $ 43,052 $ 43,959 $ 87,004 $ 89,164 Variable lease income 13,805 14,602 27,709 27,849 Franchise rental income (a) $ 56,857 $ 58,561 $ 114,713 $ 117,013 _______________ (a) Includes sublease income of $ 41,489 and $ 42,921 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $ 83,531 and $ 85,942 for the six months ended June 28, 2020 and June 30, 2019, respectively. Sublease income includes lessees’ variable payments to the Company for executory costs of $ 9,450 and $ 9,779 for the three months ended June 28, 2020 and June 30, 2019, respectively, and $ 19,159 and $ 19,211 for the six months ended June 28, 2020 and June 30, 2019, respectively. 26 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (16) Transactions with Related Parties Except as described below, the Company did not have any significant changes in or transactions with its related parties during the current fiscal period since those reported in the Form 10-K. TimWen Lease and Management Fee Payments A wholly-owned subsidiary of Wendy’s leases restaurant facilities from TimWen, which are then subleased to franchisees for the operation of Wendy’s/Tim Hortons combo units in Canada. During the six months ended June 28, 2020 and June 30, 2019, Wendy’s paid TimWen $ 7,408 and $ 8,140 , respectively, under these lease agreements. In addition, TimWen paid Wendy’s a management fee under the TimWen joint venture agreement of $ 101 and $ 103 during the six months ended June 28, 2020 and June 30, 2019, respectively, which has been included as a reduction to “General and administrative.” (17) Guarantees and Other Commitments and Contingencies Except as described below, the Company did not have any significant changes in guarantees and other commitments and contingencies during the current fiscal period since those reported in the Form 10-K. Refer to the Form 10-K for further information regarding the Company’s additional commitments and obligations. Lease Guarantees Wendy’s has guaranteed the performance of certain leases and other obligations, primarily from former Company-operated restaurant locations now operated by franchisees, amounting to $ 74,538 as of June 28, 2020. These leases extend through 2045. We have not received any notice of default related to these leases as of June 28, 2020. In the event of default by a franchise owner, Wendy’s generally retains the right to acquire possession of the related restaurant locations. Letters of Credit As of June 28, 2020, the Company had outstanding letters of credit with various parties totaling $ 26,374 . Substantially all of the outstanding letters of credit include amounts outstanding against the 2019-1 Class A-1 Notes. We do not expect any material loss to result from these letters of credit. (18) Legal and Environmental Matters The Company is involved in litigation and claims incidental to our current and prior businesses. We provide accruals for such litigation and claims when payment is probable and reasonably estimable, and we believe we have adequate accruals for continuing operations for all such matters. We cannot estimate the aggregate possible range of loss for various reasons, including, but not limited to, many proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur and/or significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult and future developments could cause these actions or claims, individually or in aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows of a particular reporting period. We previously described certain legal proceedings in the Form 10-K. As of June 28, 2020, there were no material developments in those legal proceedings. 27 Table of Contents THE WENDY’S COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands Except Per Share Amounts) (19) Segment Information Revenues by segment were as follows: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Wendy’s U.S. $ 331,258 $ 359,155 $ 662,299 $ 692,641 Wendy’s International 14,003 17,030 29,475 33,028 Global Real Estate & Development 57,045 59,163 115,492 118,262 Total revenues $ 402,306 $ 435,348 $ 807,266 $ 843,931 The following table reconciles profit by segment to the Company’s consolidated income before income taxes: Three Months Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Wendy’s U.S. (a) $ 93,136 $ 102,973 $ 174,964 $ 192,627 Wendy’s International 3,594 5,482 8,689 11,229 Global Real Estate & Development 23,711 29,899 50,201 56,852 Total segment profit $ 120,441 $ 138,354 $ 233,854 $ 260,708 Advertising funds deficit ( 1,020 ) ( 2,055 ) ( 2,407 ) ( 2,055 ) Unallocated general and administrative (b) ( 23,051 ) ( 20,610 ) ( 47,170 ) ( 41,352 ) Depreciation and amortization ( 34,714 ) ( 31,484 ) ( 65,760 ) ( 64,669 ) System optimization gains, net 1,987 110 2,310 122 Reorganization and realignment costs ( 2,911 ) ( 3,570 ) ( 6,821 ) ( 4,368 ) Impairment of long-lived assets ( 117 ) ( 198 ) ( 4,704 ) ( 1,684 ) Unallocated other operating income, net 46 26 91 137 Interest expense, net ( 29,085 ) ( 29,931 ) ( 57,610 ) ( 59,013 ) Loss on early extinguishment of debt — ( 7,150 ) — ( 7,150 ) Other (expense) income, net ( 144 ) 2,247 932 4,947 Income before income taxes $ 31,432 $ 45,739 $ 52,715 $ 85,623 (a) For the three and six months ended June 28, 2020, includes advertising funds expense of $ 2,185 related to the expected Company funding of incremental advertising during 2020. (b) Includes corporate overhead costs, such as employee compensation and related benefits. 28